Nokia Corp (ADR) (NOK) stock has fallen 20% this year, with investors realizing that it is going to take some time to create the cost savings and operating synergies that the company promised investors when it merged with Alcatel Lucent SA (ADR) (ALU). Nokia’s most recent quarter confirmed this much to be true.
However, this case of delayed gratification does not mean that NOK stock is no longer a good investment. In fact, the losses make Nokia a terrific investment, with investors seemingly blinded at what Alcatel Lucent is doing for NOK’s business.
What ALU Merger Did for NOK Stock
Nokia is going to provide cloud network infrastructure to China Mobile Ltd. (ADR) (CHL). This includes its latest technology, AirScale, built for the Internet of Things and to power 5G and 4G networks. China Mobile will be the first to deploy NOK’s AirScale base stations.
Furthermore, Nokia will provide China Mobile with IP routing and optical transport services along with software. In exchange, China Mobile will pay NOK $1.5 billion over the next year, making it a huge deal for the telecom equipment company.
However, make no mistake that had Alcatel Lucent and Nokia not been the same company, this $1.51 billion deal would have never existed.
Alcatel Lucent and NOK are different types of equipment vendors, with the former selling equipment that improves networks and allows for connectivity, while the latter is involved with the actual construction of networks. As explained last year, Alcatel Lucent has been dominant in China, but not Nokia.
ALU had a partnership in China prior to the Nokia deal that created $5 billion in revenue, whereas NOK barely topped $1.5 billion annually before its buyout offer for ALU.
However, ever since Nokia’s offer to buy ALU, the company has been positioning itself in China for success. First, it established itself as a partner in ALU’s joint venture with China Huaxin by changing the name from Alcatel-Lucent Shanghai Bell to Nokia Shanghai Bell to create brand appeal. Then, the deals started to roll in for NOK, which included expanded or new partnerships with each of China’s three major telecom companies.
This $1.5 billion deal is no different. Sure, it has Nokia’s name on it, and looks like the work of Nokia alone, but the reality is that it combines the services of both Nokia (base stations) and Alcatel-Lucent (IP routing), all bundled up into one attractive deal for the world’s largest wireless company. All of this is great news for NOK stock, and most importantly, it’s all thanks to ALU.
Making the Case for Nokia stock
So, the advantages of the ALU tie-up for NOK stock are already clear and evident, especially in China where ALU had a market-leading presence.
Moving forward, the big question is when will NOK start to use its market leading presence in other regions of the world, like India, to land ALU and itself larger deals? In my opinion, such deals will follow as the two companies become established.
Remember, many customers delayed orders during Nokia’s last quarter as the two companies merged, and don’t forget that this merger of mammoth companies just finalized earlier this year. It is going to take some time, but in the end NOK is going to be able to find major cost synergies that lead to a reduction in workforce up to 14% and major margin improvements.
When coupled with the opportunity to land new, bigger deals like China Mobile, it is obvious that a beaten down Nokia stock, paying a dividend yield upwards of 5% is too good to pass up.
As of this writing, Brian Nichols does not own any of the aforementioned securities, but may initiate a long position in Nokia in the next 72 hours.
